Advice for Dylan the Daytrader

There’s a tremendously depressing in-depth article at the Washington Post centered around a group of daytraders in southern Florida that’s been pinging around the financial blogosphere all weekend. It’s focused on one of these traders, a 25-year old named Dylan who seems to have had better than average luck so far and is, at the very least, realistic about the career path he’s on…

What mostly weighs on their minds is whether they can turn this exciting, lucrative, adrenaline-filled job into a lifelong career. It’s not just the trading odds that are against them. The psychological odds are, too.

“The reason why there aren’t older guys in the office is because of the stress,” Dylan says. “I can see even now that you can get burned out after doing it for five, 10 years. There are nights you can’t sleep because you’re so exposed, or you lie there thinking about the big jobs number that is coming out tomorrow and you know you’re either going to earn $50,000 or lose $50,000, but you don’t know which.”

Under stress, a trader is apt to become too cautious or too comfortable with one trading strategy — and before long he’s caught in one of those self-
reinforcing downward spirals of declining income, declining confidence and declining risk tolerance.

I have a very simple piece of advice for you, Dylan, having watched a few waves of this daytrading thing since it first began in the late 90’s. I know guys who are really good at it and love it but they are the exception. A tiny minority.

Before I impart my advice, you should know the following – even if I’m merely reinforcing the things you’ve already come to realize:

1. The odds are against you (or anyone else) being consistently profitable through all of the different market environments that lay ahead.

2. The odds are also against you maintaining your sanity and staying one step ahead of machines that are learning your strategies and being trained to kill you.

3. More importantly, the frustration of putting in the work, deserving to succeed and then losing anyway is one of the worst feelings known to man, a crushing blow to one’s psyche, ego and soul. The thing about short-term market speculation in what is essentially a complex adaptive system is that this will happen all of the time no matter how hard you work.

4. Independent trading adds very little to a resume as the skills are not exactly readily transferrable to most of the economy, even within the mainstream financial realm. I have friends who’ve spent years trading who’ve had to dress this time spent as an IT position to get into a company doing something more permanent.

That said, it’s not my place to tell you to stop doing something you’ve got a knack for and that’s making you money. You deserve all of the success and profits you’ve worked for and I hope your run continues.

So if you do plan to stay in the daytrading industry, do yourself a huge favor: Own the firm.

Buy into the firm you’re currently working at or raise the capital to start your own. Because should your skill decline or your nerves begin to betray you, at least you can continue to get paid from the efforts of the other traders, some of whom will win but most of whom will not. You will benefit regardless. Look around: the big success stories are usually – not always, but usually – the owners of the daytrading firms themselves.

When you own the firm, you can focus on improving the technology, getting competitive with the algos of other firms, building software to speed up your processes etc.

When you own the casino, you can worry less about who wins and who loses each day, week, month. You can be paid on the trading activity of others, marking them up for licensing, ticket charges, margin balances, data feeds, desk space, “education” – whatever you want. Once the bodies are in the seats, they become not just your employees but your customers as well. And then you can trade your own account without it being Life or Death each day. With this pressure relieved, you may even see your own trading results improve.

I leave you with the sage words of David Merkel, from a post he put up about how people become rich from late January (emphasis mine):

Those that become super-rich form their own firms, and use them to further their wealth. They hire talented people to grow their wealth. It can be a purely industrial firm. It can be part industrial and investing, like Loews, Berkshire Hathaway, Leucadia, Icahn, etc. It can be a private firm, whether private equity, a hedge fund, or an industrial firm.

The main idea here is that great wealth typically comes through running a large firm that is very profitable, which concentrates the efforts of others. Significant wealth never comes through your own labors or secondary-market investing. It comes through creating a very profitable firm.

Now think about how many real-world examples there are of single investors or traders who’ve made it big absent the equity ownership of a company. I can think of none offhand, although I’m sure they exist. But I can name a hundreds of owners or founders of firms who’ve made a fortune by simply setting up the machinery and allowing others to try their luck or skill.

Dylan, you seem smart. Start planning for a reality in which you’re not chained to the monitor and you don’t have to kill a lion each month in order to eat. You will thank me someday.